Boats as a Second Residence

It is possible to declare your boat as a second home. Many millionaires and even billionaires may get tired of air travel and hit the high seas on the mega-yacht. They may do this for more than the reason of being cooped-up on a jet and wanting some fresh sea air in a beautiful setting; it may be a declaration as a second home.

Let’s begin with the “mega.” The Octopus, mega-yacht of co-founder of Microsoft has a permanent crew of sixty, two helicopters, a ten-man submarine and seven boats; what you would call a real sea monster. Though this boat is over 200M, for 80M you can go somewhere like Monaco and get a 279-foot yacht with all the trimmings for living more than comfortably.

When these wealthy people bone up to spend this amazing amounts of cash, there just may be another reason; tax deductions. It is impossible to declare a jet a second residence, a yacht however; open market for business and personal deductions. Not to mention, the travel deductions for heading to their private homes is another reward for the rich.

Another reason may be the privacy. Perhaps you are just learning about The Octopus and surprised, but billionaires like Ted Turner and David Murdock have their second residence homes parked or moored in the United States . Why would they not take the advantage of taxes offshore? Most likely, they claim these luxury vehicles as second residences on their US taxes by claiming a second onshore residence; a very valuable tax deduction.

The uber-wealthy crave these creatures because though the boats are flash, but, they are not visible, except for those who look.

How it all works into the lifestyles of the wealthy –

Effectively when somebody lives on board a boat (whether first or second residence) they are deemed to be living where the boat is placed. These jurisdictions have laws under their countries and maritime laws in these countries that determine how many days the boat must be parked to make claims of tax residency. What comes into question is the residency; is the boat cruising or qualified for the mooring or “parked” residency qualifications. These exact qualifications vary country to country. Also, remember that tax is jurisdictional and it is possible to be taxed in more than one country or jurisdiction.

To prove tax residency in a particular country the only accepted evidence is a tax certificate issued by the Tax Authority of a country. The person who owns a certificate by way of proof of his/her tax residency can therefore be considered as a non-tax resident.

It doe not matter if the boat moves from one marina to another inside the country, it’s the accumulative time spent in that jurisdiction and the police can easily calculate how long any boat has been inside the country.

It can be a simple as a small boat with a mattress and a camping stove or as complicated as a mortgage on a boat a lavish lifestyle and a very sizable deduction. The second-home deduction for interest paid on boat loans is the biggest tax deduction in American recreational boating. It is used on runabouts that have tiny cruddy cabins and multimillion-dollar yachts. Boat manufacturers nowadays have the tax deduction in mind when they install the proper amenities in small boats.

The Internal Revenue Service rarely bats an eye at questionable cases, nor does it keep track of the lost revenues. It is too vast and scattered. This does not mean you should not report or pay your due amount of taxes. Approximately 500,000 pleasure boats in the United States are large enough to qualify, about 3 percent of all recreational boats in the country, according to the National Marine Manufacturers Association.

Less than 100,000 people actually live full time on boats according to US Census.. Living on a boat is not the required stipulation for some of these deductions though, all that is needed is a sleeping platform, toilet and cooking facilities, and some indication that the owner stays overnight on the boat at least 14 days a year, according to Internal Revenue Service regulations

Rob Nichols, assistant secretary of the U.S. Treasury for public affairs, cautions, “Taxpayers aware of the 14-day requirement who ignore the requirement are committing tax fraud and face substantial civil, and perhaps criminal, penalties for doing so.”

Studies have shown the Internal Revenue Service is buried in a backlog of uninvestigated cases in which people have outright failed to pay taxes, or sheltered income in offshore accounts even though the Bush Administration has called for an IRS crackdown. However, the second residence clause is a gray area and the water remains murky.

Extending the time requirement would be very unpopular. There is talk of extending the fourteen days to ninety days to take advantage of the second home provision; not to mention the write offs of the registrations fees. These deductions may significantly lower the wealthy into lower tax brackets, covering the cost for luxury. (A side note is that those luxury travel buses and Winnebago’s may also qualify.)

A little history –

President Reagan vowed during his second term to simplify the tax code, as did President Bush (I). The opposition continues today with the identical argument. Though deductions for most consumer-loan interest payments were eliminated, a prominent U.S. senator objected strenuously when borrowing on boats was kept as a deduction. At a 1987 hearing, he called the second-home tax break for boats “an enormous loophole” that had to be eliminated.

“Do you think we should allow somebody to deduct interest payments on a yacht when a young person cannot deduct interest payments on a car, for instance?” asked then-Sen. John Danforth—a Republican—at a Feb. 4, 1987 , Senate Finance Committee hearing.

“If you ask me do I think it is the right tax policy, I would say there is probably a question about it,” replied Treasury Department official J. Roger Mentz.

A short time later, Sen. John Chaffee of Rhode Island , a fellow Republican, interjected that he was from the “largest boat-building state in the country,” where yachts are simply called boats. “This isn’t some scandalous thing,” he said. “Indeed, perhaps it should be encouraged.”

Danforth failed to kill the loophole, stifled by Chaffee. Danforth who became President Bush’s ambassador to the United Nations. The use of the second-home deduction is, indeed, encouraged as Chaffee had hoped. Today, the National Marine Bankers’ Association puts out a brochure on the deduction with the headline: “If you’re paying cash for your boat, you’re probably paying too much.”

Boat manufacturers adamantly oppose any changes in these tax advantages. They still cringe at a luxury tax imposed on boat purchases over $100,000 imposed in 1991 and rescinded three years later.

The fight against luxury taxes continues, one thing is for sure; one of the main reasons for the luxury yachts; luxury – yes, tax deductions, definitely!